Stock research guides · Guide 5 of 10
Profitability and growth metrics: ROIC, margins, ROE and revenue growth
How well a business turns capital into profit, how much revenue survives each layer of costs, and whether growth is durable and backed by cash.
Key takeaways
- Return on invested capital measures the business, not the return you earn on its shares.
- Follow margins from gross to net to see which costs absorb revenue.
- Borrowing can lift return on equity without improving the underlying business.
- Compare earnings growth with free cash flow growth; a persistent gap deserves investigation.
Profitability measures how much of each sale a business keeps and what it earns on its capital; growth shows whether that base is expanding. By the end of this guide you will be able to calculate the main returns, margins and growth rates, and spot how each can mislead, from borrowing that flatters a return to one strong year posing as a trend.
Return on invested capital
Return on invested capital (ROIC) asks how much after-tax operating profit a business earns on the capital that shareholders and lenders have committed to it.
NOPAT = operating profit × (1 − tax rate)Invested capital = shareholders' equity + debt − cashROIC = NOPAT ÷ invested capital × 100NOPAT is net operating profit after tax. Definitions of invested capital vary between data providers, for instance in how they treat leases, goodwill and cash, so compare ROIC figures from one source.
Take a hypothetical company with operating profit of 250 million, a 20% tax rate and invested capital of 1,000 million: NOPAT is 200 million and ROIC is 20%. A business earning more than its cost of capital, the return its lenders and shareholders require, creates value as it grows; one earning less destroys value by growing.
Read the level and the trend together. ROIC sliding from 30% to 25% to 20% over three years is still high but deteriorating, perhaps because of competition or less productive investment. An economic moat typically shows up as returns that stay high for years.
ROIC measures the business, not your investment: a company earning 20% on its capital can still be expensive, as the valuation guide explains, and its share price can fall as well as rise.
Gross, operating and net margins
Margins follow revenue down the income statement, showing how much survives each layer of costs. Gross margin deducts the direct cost of what was sold; operating margin also deducts the costs of running the business, such as sales, administration and research; net margin also takes out interest and tax, and includes any other gains or losses.
Gross margin = gross profit ÷ revenue × 100Operating margin = operating profit ÷ revenue × 100Net margin = net profit ÷ revenue × 100Take a hypothetical company with revenue of 1,000 million:
| Line | Amount (millions) | Share of revenue |
|---|---|---|
| Revenue | 1,000 | 100% |
| Cost of sales | −600 | −60% |
| Gross profit | 400 | 40% gross margin |
| Operating expenses | −250 | −25% |
| Operating profit | 150 | 15% operating margin |
| Interest and tax | −50 | −5% |
| Net profit | 100 | 10% net margin |
Compare trends, not single years. If revenue grows to 1,200 million but gross profit stays at 400 million, gross margin falls from 40% to about 33%: stronger sales need not mean stronger profits. When margins improve, ask whether durable pricing power, cost control or a one-off gain is responsible, and compare similar companies, because typical margins differ widely by industry.
Return on equity, return on assets and debt
Return on equity (ROE) measures net profit against shareholders' equity; return on assets (ROA) measures it against everything the company owns, however it is financed.
ROE = net profit ÷ shareholders' equity × 100ROA = net profit ÷ total assets × 100ROE = ROA × total assets ÷ shareholders' equityThe third line shows how debt flatters ROE: the less equity behind the same assets, the bigger the multiplier. Take two hypothetical companies with identical operations: assets of 1,000 million, operating profit of 200 million and a 25% tax rate. Company B has financed half its assets with debt at 4% interest.
| Hypothetical, in millions | Company A | Company B |
|---|---|---|
| Debt | 0 | 500 |
| Shareholders' equity | 1,000 | 500 |
| Interest | 0 | −20 |
| Net profit after tax | 150 | 135 |
| Return on assets | 15% | 13.5% |
| Return on equity | 15% | 27% |
B's ROE is almost double A's, yet its business is no better, its ROA is lower and it owes interest whatever happens to profits. Buybacks and past losses can shrink equity and inflate ROE in the same way, and negative equity makes the ratio meaningless. Read ROE alongside ROA, ROIC and leverage.
How to read growth rates
Check the calculation window and the unit before comparing two growth figures. When a metric is already a percentage, its change can be stated two ways: operating margin rising from 10% to 12% is up 2 percentage points, which is a 20% increase. Mixing the two exaggerates or understates the change.
Annual growth = (this year − last year) ÷ last year × 100Cumulative growth = (final value − starting value) ÷ starting value × 100CAGR = ((final value ÷ starting value)^(1 ÷ years) − 1) × 100Take a hypothetical company whose revenue goes from 100 million to 110 million, 120 million and then 150 million over three years. The latest annual growth is 25% and cumulative growth is 50%, while the compound annual growth rate (CAGR) is about 14.5% a year, because 1.5 raised to the power of one third is about 1.145. Dividing 50% by three gives 16.7%, which overstates it, because each year's growth builds on the last.
Each figure answers a different question: what happened last year, how far the business has come, and what steady pace would have produced the same result. None shows how uneven the path was, and a single surge like the 25% year may not be a durable trend.
Earnings growth, cash flow growth and research spending
Earnings per share (EPS) can grow faster than the business, because buybacks divide the same profit among fewer shares. If a hypothetical company's net profit stays at 100 million while buybacks cut its shares from 100 million to 90 million, EPS rises from 1.00 to about 1.11: 11% growth with no growth in profit.
Free cash flow can move the other way. If the same company's operating cash flow rises from 150 million to 160 million while capital expenditure doubles from 50 million to 100 million, free cash flow falls from 100 million to 60 million, down 40%, even as EPS rises. The investment may build future revenue or may not, and working capital can absorb cash too. A gap between earnings and cash growth is a reason to ask what drives it and whether it can last, not an automatic warning.
Research and development (R&D) spending is an investment in future products, but accounting rules generally expense research as it happens, so it lowers today's profit. Rising R&D shows more spending, not success: a hypothetical rise from 100 million to 150 million is 50% growth, and whether it pays off appears only later, in revenue, margins and cash. The disruptive growth guide looks at that trade-off.
Putting it into practice on dotQuant
The Key Metrics panel on a symbol page shows fundamentals "as of" the report date, over up to five years. Two of its groups follow this guide, each with a headline metric and a badge from fixed bands:
- "Profitability & returns": headline "Return on invested capital", with "Weak" up to 8%, "Decent" up to 15% and "Strong" above; rows "Gross margin", "Operating margin", "Net margin", "Return on equity" and "Return on assets".
- "Growth": headline "Revenue growth, year over year", with "Declining" up to 0, "Modest" up to 15% and "Strong" above; rows "Revenue growth rate (multi-year)", "Earnings-per-share growth rate", "Free cash flow growth" and "Research & development growth".
The bands are the same for every sector, so a badge is a starting point rather than a conclusion: a "Strong" return can still be deteriorating. In "Profitability & returns", each row shows a "Y/Y change" against the prior financial year; the "Growth" rows are rates of change already and carry none. A dash means unavailable, not zero, or a change too small to show, so a missing research figure is not a zero budget.
The "Fundamentals Matrix" panel shows reviews by six AI analysts: AI-generated research perspectives with fixed investing styles, not human analysts. Their "BULLISH", "NEUTRAL" or "BEARISH" labels are not recommendations, their confidence is not a probability of profit, and their evaluation dates, prices and reporting periods can differ from the Key Metrics panel, so check a review's period and method before comparing figures.
Without an account you can open any symbol's page and read both panels; a guest watchlist lives only in that browser, and a persistent one needs an account. See the Key Metrics and AI analysts documentation.
Common questions
What is a good return on invested capital?
There is no single threshold. A common test is whether ROIC stays above the company's cost of capital over several years, and typical levels differ by industry, so compare similar businesses.
What is the difference between ROE and ROIC?
ROE divides net profit by shareholders' equity alone, so debt and buybacks can lift it. ROIC divides after-tax operating profit by the capital from shareholders and lenders together, so it depends less on how the company is financed.
Can revenue grow while profit falls?
Yes. If costs rise faster than sales, margins shrink and profit can fall as revenue climbs, which is why growth is best read alongside margins.
Further reading
- Stock valuation ratios: what the market pays for these profits and growth rates.
- Financial health and capital allocation: debt, cash conversion, dividends and buybacks.
- Economic moats, management quality and macro momentum: why lasting returns on capital matter.
- SEC: Beginners' Guide to Financial Statements: how the income statement, balance sheet and cash flow statement fit together.
- SEC: How to Read a 10-K: where these figures sit in a US annual report.